Private Mortgage Insurance (PMI)
If your down payment on a home is less than 20 percent of the
appraised value or sale price, you must obtain private mortgage
insurance, known as PMI, with your lender. This will enable you
to obtain a mortgage with a lower down payment because your
lender is now protected against any default on the loan.
PMI charges vary depending on the size of the down payment and
the loan, but they typically amount to about one-half of one
percent of the loan, according to the Mortgage Bankers
Association of America. Mortgage insurance premiums are not tax
Let's say you put down 10 percent or $10,000 on a $100,000
house. The lender multiplies the 90 percent loan, or $90,000, by
.005 percent. The result is an annual PMI of $450, which is
divided into monthly payments of $37.50.
Most homebuyers need PMI because 20 percent of the sale price
on a home is a lot of money; for instance, that's $20,000 on a
$100,000 home. Homebuyers must maintain the PMI premiums until
they cross that one-fifth-of-principal threshold, a process that
can take years in longer-term mortgages.
Keep track of your payments on the principal of the mortgage.
When you reach 80 percent equity, notify the lender that it is
time to discontinue the PMI premiums. A new law that takes effect
in the summer of 1999 will require lenders to tell the buyer at
closing how many years and months it will take for them to pay 20
percent of the principal to cancel PMI.
Note: The law does allow lenders to continue requiring PMI all
the way down to 50 percent equity for so-called high-risk
borrowers. Traditionally, those loans that are considered riskier
include reduced documentation loans, in which customers provide
less proof of income and other information during the approval
process. Loans for people with spotty credit histories and higher
debt-to-income ratios also fall into this category. Additionally,
some FHA loans require payment of PMI throughout the entire life
of the loan.
Ways to avoid PMI
In today's market, there are some new ways to avoid mortgage
insurance even when you don't have the standard 20 percent down
Pay more interest: Some lenders will waive the mortgage
insurance requirement if the buyer accepts a higher interest rate
on the mortgage loan. The rate increases generally range from .75
percent to 1 percent, depending on the down payment. The
advantage is that mortgage interest is tax deductible.
Using an "80-10-10" loan: This program involves two loans and
a 10 percent down payment. The 90 percent loan is financed with a
first mortgage equal to 80 percent of the sale price, and a
second mortgage for the remaining 10 percent of the sale price.
The second mortgage has a higher interest rate but since it
applies to only 10 percent of the total loan, the monthly
payments on the two mortgages are still lower than paying one
mortgage with mortgage insurance. Plus, again, there is the
advantage of mortgage interest being tax deductible.
Example: If we compare the purchase of a $100,000 home under
the "80-10-10" plan with a standard fixed mortgage including PMI,
we find that the former is $17.45 cheaper each month.
Here's how it works. Under the "80-10-10" plan, the 10 percent
down payment on a $100,000 house is $10,000. The first mortgage
is $80,000 at 7.50 percent, which comes to a monthly payment of
$559. The second mortgage for $10,000 has a 9.50 percent interest
rate, making a monthly payment of $84. Total monthly payments of
the two loans: $643.
With a $10,000 down payment, one mortgage of $90,000 at 7.50
percent has a monthly payment of $629, plus PMI of $31.45, making
a total payment of $660.45.
About The Author
Martin Lukac, represents, #1 Loans USA, a finance web-company
specializing in real estate/mortgage market. We specialize in
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